Brown defends response to banking crisis

Prime Minister Gordon Brown today defended his response to the banking crisis, insisting Britain has set a model for the rest of the world to follow.

Mr Brown dismissed suggestions that he should have dumped the "tripartite" regulatory system that sees responsibility shared between the Treasury, Bank of England and Financial Services Authority or should have required banks to split their retail and "casino" activities.

Appearing before the House of Commons Liaison Committee, the PM said that overseas influences were to blame for the crisis which saw the collapse of several British banks last autumn.

And he said he remained "angry" over the inflated pay and reckless speculation indulged in by some bankers, which he described as "irresponsible and unfair to the people of this country".

He welcomed the report published today by Sir David Walker, which calls for tougher non-executive directors to crack down on boardroom excesses.

"He makes some very clear recommendations which I believe will be adopted," Mr Brown said. "There have been excesses, it is seen by the public as irresponsible and unfair, we have got to take the action."

As he gave evidence to the committee, which brings together the chairmen of the powerful select committees which hold Government departments to account, Mr Brown was challenged over how the system he set up in 1997 had presided over the worst banking crisis since the 1930s.

This month's white paper on banking reform was criticised for not offering new powers to the Bank - as governor Mervyn King wanted - but instead formalising the tripartite system into a new Council for Financial Stability.

But Mr Brown said: "The tripartite system is the way forward. I believe other countries will follow it. Self-regulation is out for financial institutions and that is why a body like the FSA is necessary.

"In matters of financial stability, we have got to involve the three institutions and the Bank of England clearly has a major role to play.

"The reason that the tripartite group is formalised in this way is to recognise the importance of the three institutions being able to work more formally and institutionally together in the future.

"That's the basis of the next stage of our financial reform and I believe that other countries will increasingly follow what we are doing."

Asked if he thought Mr King had become a "loose cannon", Mr Brown replied: "No. The governor does a good job and people recognise his talents and that's why he was reappointed for a second term as governor."

Mr Brown hailed the Bank's success in keeping inflation and interest rates low over the past decade. He said that the global financial crisis had hit Britain "very, very hard" because of its large financial sector, but insisted that it did not originate in the UK.

"Most of the problems that have hit British banking have been from the overseas assets and overseas investments and overseas interests that they have held," he said.

Mr Brown added: "The behaviour of banks, both in terms of their own remuneration and in the way in which they became in some cases speculators with people's money rather than stewards of people's money was irresponsible and unfair to the people of this country.

"What we had to do was to make sure that we protected the savings of ordinary families and that, I believe, we have managed to do.

"Equally, we had to restructure the banking system for the future on sound principles that ensure that - while we are part of a global economy - the integrity and trust that is necessary for a banking system exists in every part of that global system.

"That's why we are involved in the international discussions but why also we are making these changes in Britain to deal with the excessive boardroom practices that have shocked people and appalled people and made me angry as well.

"We are bringing in these new rules about the long-term nature of remuneration and reward and about proper transparency and, if necessary, regulation of the banking system where there are short-term deals getting remuneration that seems unjustified."

Mr Brown rejected suggestions that he should require banks to separate retail and investment activities into distinct "high street" and "casino" operations.

"Let us be clear, we had crises in retail banks and we had crises in investment banks," said the PM. "Not one group of banks was immune from this crisis.

"What we have got to deal with, in my view, are the high-impact banks and this is what the Government's proposal is.

"Where a bank has such resources and such potential risks for the financial stability of the country, the regulatory measures we have got to make sure it is doing the right things have got to be stronger for the future, and we have got to have a better grasp of what it is doing in other countries."

He added: "There has got to be a tougher system of regulation applied to bigger institutions. That is what we are going to do in future. They will probably have to hold more capital as a result of being a bigger risk to the financial system as a whole.

"These are the measures that (Chancellor) Alistair Darling is bringing forward."